February 15, 2025 Welcome back to our blog, where we aim to equip traders and investors with the knowledge needed to understand the crypto world and how to master the markets with our wide range of advanced crypto bots.
In today’s post, we’ll discuss one of the most essential cornerstones of automated crypto trading – the stop-loss.
As usual, we’ll start by covering the basics, answering questions like what stop-losses are, why traders need them, how they have evolved, what types there are, and how they are structured.
Then, we’ll delve into trailing stop-losses and advanced versions of classic stop-losses common in automated trading systems. We’ll see what’s unique about it and what differentiates it from regular stop-losses. Like always, we’ll wrap everything up by giving our expert advice on some of the best practices for using these advanced settings as part of your crypto trading strategies.
Before we move forward with our busy itinerary, this is the time to remind you that all of the information presented in this blog post is intended solely for educational purposes and should not be considered a call to action or any other kind of financial advice. Traders must consider their economic status and risk tolerance before employing any crypto trading strategy. Crypto trading involves inherited perils, research, and trading at your own risk.
While many know the term stop-loss regarding the advanced settings of their crypto bot, stop-loss orders started long before fully automated crypto trading was available to everyone.
In traditional finance, stop-loss orders refer to various methods for managing the risks of long positions and open trades. In almost all cases, stop-losses function as a safety measure triggered only when things aren’t going as expected.
As their name suggests, stop-losses are tools designed to limit potential losses to a specific amount you feel comfortable with. The stop-loss will be below the current market price for long positions. It would be the opposite for short positions, with the stop-loss above the average entry price.
This same logic can also be applied to any token you hold. We can use stop orders to hedge our portfolio’s risk in this case. By placing a stop-loss order that will be triggered once the market price reaches your average purchasing price for the token, you can limit the risk of your position to break-even levels.
This is why stop-loss is often viewed not just as one of the advanced settings of your crypto bot but also as a more sophisticated tool that, similar to options trading, offers a straightforward way to hedge your portfolio.
Stop-loss is an excellent tool for traders to manage their risks and protect themselves from occasions when the market moves in the opposite direction of their trades. This is true for cryptos and almost any other type of financial asset that can be traded on an exchange.
In automated trading systems, stop-losses are staple ingredients that enable traders to adjust their crypto bots’ operations to match their personal risk tolerance. With a proper stop-loss, traders can minimize losses if their original plan falls through.
With that, there is a slight downside to using a stop-loss. The advantages outshine it, but crypto traders should still be aware. Sometimes, a stop-loss can close your position too soon, preventing you from maximizing the potential of the initial trade. This means that even if you accurately predict where prices are heading, a short burst in volatility can trigger your stop-loss and take you out of the market, although it is moving in your favor.
Most trading experts agree that this could hinder overall returns. However, it is a small price to pay for the safety of being protected against significant risks. As we’ll explore later, there are a few steps crypto traders can take to reduce the potential adverse effect of using a stop-loss without sacrificing any of its benefits.
In classic trading, where the entry point for a trade is handpicked manually, many different methods exist for determining where to place your stop-loss. Support and resistance levels, Fibonacci retracements and extractions, and other common technical indicators can all be used to settle on your potential safety cushion. This form of semi-automatic trading is challenging to follow since it requires traders to constantly monitor price action in the market and have the expertise to analyze it correctly.
In the world of fully automated crypto bots, the most common method for working with a stop-loss is in percentage form. This allows crypto traders to evaluate the risk level they feel comfortable with quickly. It also allows traders to use the same preferences across the board without adjusting them separately for every position.
In most crypto bots available today, including ours, you would typically find at least two kinds of percentage-based stop-losses. Some are static, while others are more dynamic.
The classic stop-loss is static. It is found under the name default stop-loss in our bots’ settings. In these versions, our potential exit points are determined solely based on the entry price of the specific trade.
The dynamic version of the stop-loss is called a trailing stop-loss. Here at Cornix, we offer a wide range of trailing stop-losses from which to choose. The common ground is that they “trail” the price action in the market, moving your stop loss along with the price movement, all while keeping the same level of risk tolerance.
While we have provided detailed explanations, an oversimplified example is the best way to understand the differences between a stop-loss and a trailing stop-loss.
Without going into any specific numbers, let’s choose our default stop-loss and the percent below the highest trailing stop-loss, both with the same value as a trigger. To make things easier, we’ll examine two straightforward scenarios – a winning trade where the market moves only in our favor and a losing trade where the market moves only to the opposite side of our trade.
If everything goes wrong, it means our average entry point for the trade is equal to the highest price point of the market since we opened our position. Since both stops use almost the exact numbers, our static stop-loss and dynamic trailing stop-loss will be triggered simultaneously.
If everything goes smoothly, the current market price will eventually surpass our initial average entry price for the trade. While our static stop-loss will remain the same since it’s pegged to our entry price, our trailing stop-loss will be updated using the new highest price mark for its calculations. This will cause the trailing stop to “take charge” over your position by improving your potential exit points, making the static stop-loss irrelevant for the rest of the trade.
As we see in both examples, the main difference between a stop-loss and a trailing stop-loss is what benchmark they use in their calculations.
While the static stop-loss is locked on the entry point to trade for calculating your exit, the dynamic trailing stop-loss keeps “trailing” the token’s price, using real-time market data to establish more relevant triggers for when to close your position potentially.
This means that, in most cases, you are likely to notice a difference between your default stop-loss and trailing stop-losses if the trade moves in a favorable direction at some point. That way, the trailing stop-loss allows traders to lock in some of their profits while maintaining the same general level of risk aversion.
As mentioned, stop-loss and trailing stop are absolute staples in almost every automated crypto trading strategy. In crypto trading, it is always better to be safe than sorry.
That said, it doesn’t mean these safety precautions work flawlessly every single time. Here are some recommended steps crypto traders can take to optimize their results to maximize their stop-loss and trailing stop-loss settings.
Ideally, we’ll want our stop-loss and trailing stop to let us enjoy the best of both worlds:
To achieve these two contradictory goals, crypto traders need to develop a value that could provide adequate protection from the downside without limiting them from pursuing the full potential of their winning trades.
Here is our recommended workflow for achieving this desired balance:
1. Determining risk tolerance is the first and arguably most important step. We all know losing is never fun, but in this step, the point is to try evaluating how much funds you think you’ll feel comfortable losing before it affects your mental health.
If you are a new novice crypto trader, a famous rule of thumb you can follow is to come up with a sum and then divide it by half to get your answer. If you recall our piece about proper risk management, you’ll be reminded that humans tend to underestimate the pain of a loss, so it’s always better to be safe than sorry.
2. The second step would be to try and ensure that our stops won’t have too many adverse effects on our winning. This means that our stops won’t be too sensitive and won’t be falsely triggered by natural volatility.
A few technical indicators can help traders gauge the volatility of tokens and ensure that their stop-losses and trailing stop-losses are not too narrow, like the Bollinger Bands and the Average True Range (ATR).
3. Once we understand a token’s inherited volatility and its alignment with our risk tolerance, we must choose which stops to use, including their optimal settings.
With so many options and variations to choose from and a lot of market data to analyze, crypto traders’ best chance to achieve optimal results is through advanced analytic tools like demo trading and backtesting.
By methodically examining our options without compromising any aspects, crypto traders can rest assured that they’ve done everything possible to determine which values work best for their automated trading strategies.
We hope you enjoyed our comprehensive guide for understanding stop-losses and trailing stop-losses and how to use them correctly.
Before we say goodbye, remember that stop-loss and trailing stop-loss are just two examples of how the advanced features of crypto trading bots like ours can help you elevate your trading skills, trading experience, and overall results to higher realms.
From a vast collection of advanced crypto bots to other complimentary trading tools like demo accounts, portfolio tracking, trading terminals, backtesting, and more, Cornix strives to give crypto traders a unique, all-in-one package that caters to everything they need.
With flexible pricing plans and a two-week, no-strings-attended free trial, it is a no-brainer to sign up and see for yourself how we can help you become a better, more profitable crypto trader.
